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Consumer Credit and Stock Returns

September 18, 2017 • Posted in Economic Indicators

Does expansion (contraction) of consumer credit indicate growing (shrinking) corporate sales, earnings and ultimately stock prices? The Federal Reserve collects and publishes U.S. consumer credit data on a monthly basis with a delay of about five weeks. Using monthly seasonally adjusted total U.S. consumer credit for January 1943 through June 2017 and monthly Dow Jones Industrial Average (DJIA) closes for January 1943 through August 2017 (almost 75 years), we find that:

The following chart shows on logarithmic scales total U.S. consumer credit and DJIA over the entire sample period. Both series generally rise as the U.S. economy grows (and the dollar inflates), but the stock market is more volatile than consumer credit. Visual inspection is not helpful in discovering a relationship between the two series.

To dig deeper, we relate changes in the two series.

The following scatter plot relates DJIA return two months hence to monthly change in total consumer credit over the entire sample period. The two-month lag ensures investors could know the change in consumer credit when trading. The Pearson correlation between the two series is -0.05 and the R-squared statistic 0.003, indicating that monthly variations in consumer credit do not materially affect near-term stock market behavior.

Might change in consumer credit lead stock market return by some interval other than two months?

The next chart summarizes correlations for various lead-lag relationships between monthly DJIA return and monthly change in total consumer credit, ranging from stock return leads change in consumer credit by 18 months (-18) to change in consumer credit leads stock return by 18 months (18), both for the overall sample period and for the second half of the sample period (starting at the end of May 1980).

All correlations are small, and variations appear to be noise. There is perhaps a consistent indication that relatively strong (weak) stock market returns over many months lead to relatively strong (weak) consumer borrowing.

In case there is an exploitable non-linearity in the monthly relationship, we consider average DJIA returns two months hence by range of monthly changes in consumer credit.

The next chart summarizes average DJIA returns two months hence across ranked fifths (quintiles) of monthly changes in total consumer credit over the full sample period (178-179 observations per quintile) and two equal subperiods (89-90 observations per quintile). The break point between subsamples is at the end of May 1980. The average DJIA return for all months in the full sample is 0.66%.

There is an indication that contractions in consumer credit indicate relatively strong future stock market returns, but the relationship between change in consumer credit one month and stock market return two months later is inconsistent across quintiles and across subsamples.

Standard deviations of future DJIA returns are somewhat higher for low than high quintiles.

Might the relationship between stock returns and consumer credit growth only emerge over the long term? To investigate further, we relate annual change in consumer credit and annual DJIA return.


The next chart relates next-year DJIA return to annual change in consumer credit over the entire sample period (73 years) and the second half of the sample period (break point at the end of 1980).

The outliers on the right side of the chart for the full sample are two years immediately after World War II. More recent data suggests that consumer credit expansion is slightly good for the stock market, but the subsample (and explanatory power) is very small.

Does stock market performance drive consumer risk-taking?

The final chart relates next-year change in consumer credit to annual DJIA return over the full sample period. Results suggest that a strong stock market has a modestly positive effect on consumer borrowing.

In summary, evidence from simple tests offers little support a belief that consumer credit is a useful indicator of future stock market behavior.

Cautions regarding findings include:

  • Analyses do not precisely match the lag in Federal Reserve publication of consumer credit.
  • Analyses are in-sample. An investor operating in real time during the sample period may find different results at different times.
  • As noted, subsamples of annual data are small for reliable inference.
  • Findings do not rule out the possibility that surprises in consumer credit expansion/contraction, relative to some measurable expectation, more usefully forecast stock market returns.

Compare findings here for consumer credit with those in “Commercial and Industrial Credit as a Stock Market Driver”.

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